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U.S. Has Royalty Plan to Give Windfall to Oil Companies
Edmund L. Andrews
New York Times, February 14, 2006, Page A1
This article reports on the Interior Department’s interpretation of various oil and gas lease provisions in contracts for drilling on federal land. The Department’s interpretation has cut royalty payments by billions of dollars over the last 5 years.
Chasing Full Employment
Louis Uchitelle
New York Times, February 12, 2006, Section 3, Page 4
This article discusses the recent evolution in public policy towards the government’s commitment to maintaining full employment.
Cheney says New Unit Will Prove Tax Cuts Boost Revenue
Nell Henderson
Washington Post, February 11, 2006, Page A11
This article reports on a new division in the Treasury Department that the Bush administration is creating, which is supposed to examine the extent to which tax cuts spur growth, and thereby boost revenue. The article asserts that the possibility that tax cuts may stimulate enough growth so that they actually increase revenue is “a long-standing source of debate among many economists and tax experts.”
This is not true. There are almost no economists who are not employed by the Bush administration who would contend that tax cuts increase growth enough to lead to a net gain in revenue. It is also worth noting that this issue was carefully examined by the Congressional Budget Office (CBO), shortly after its leadership was taken over by Douglas Holtz-Eakin, a member of President Bush’s Council of Economic Advisors (“How CBO Analyzed the macroeconomic Effects of the President’s Budget,” http://www.cbo.gov/showdoc.cfm?index=4454&sequence=0). The CBO analysis showed that under some assumptions, models showed that the growth stimulated by tax cuts would bring back between 15-20 percent of the revenue lost, although this largely came at the expense of slower growth in the more distant future. Several of the models showed little or no effect of tax cuts on growth. None of the models showed the growth induced by tax cuts coming close to replacing the revenue lost to lower taxes.
At this point, the evidence that tax cuts in general lead to less revenue is so great that questioning the proposition is comparable to questioning evolution. The article should have made it clear that there is no real debate on this point among economists.
At one point the article quotes Vice-President Dick Cheney as saying that the greater than expected tax revenue of the last two years shows that tax cuts increase revenue. There was also greater than expected tax revenue in 1995 and 1996 following President Clinton’s tax increases. It would have been useful to note this fact. Unexpected events always intervene, causing projections to be either too high or too low. This is why serious analysts would not typically generalize based on a sample of one.
Trade Gap Hits Record For 4th Year In a Row
Paul Blustein
Washington Post, February 11, 2006, Page A1
U.S. Trade Deficit Sets Record, With China and Oil the Causes
Vikas Bijaj
New York Times, February 11, 2006, Page A1
These articles report on the release of new data from the Commerce Department showing that the U.S. trade deficit for 2005 was a record 5.8 percent of GDP, or $725.8 billion. The Times article asserts that the deficit with China is largely due to the diversion of exports from elsewhere in Asia and that “the overall deficit with Asia has changed little in recent years.” In 2002, the United States had a trade deficit with the Pacific Rim countries of $214.9 billion. This deficit had grown by more than 50 percent to $328.6 billion in 2005.
At one point, the Times article reports that President Bush opposes legislation that would impose tariffs on Chinese imports because they will hurt consumers. It would have been worth pointing out that any measure that reduces our trade deficit with China will hurt consumers. Effectively, the deficit is buying financed by borrowing, just as family can pay its monthly bills by borrowing. It will hurt when the family is forced to stop borrowing. Similarly, consumers will have to pay higher prices when the deficit with China is reduced; however there is no alternative in the long-run.
Both articles express concerns that the trade deficit will lead to pressure for protectionism. This concern is strange given how committed the United States already is to protectionist policies. The United States has a long set of policies which are designed to restrict the ability of foreign professionals to compete with professionals in the United States. These protectionist measures drive up costs for consumers in the United States and reduce economic growth. There is no economic theory that shows that protection in other areas would be any worse for the U.S. economy than the protection in areas where it already exists.
Outsourcing Is Climbing Skills Ladder
Steve Lohr
New York Times, February 16, 2006, C1
This article discusses a new report on outsourcing by the National Academies of Science that suggests that the practice is likely to grow substantially over the next decade as many research jobs are relocated overseas. At one point the article cites the report’s assessment that this globalization “need not harm the United States.”
There is no obvious reason that the United States would be harmed by the opportunity to take advantage of lower cost and/or higher quality researchers in other countries. According to standard trade theory, the United States benefits from being able to hire a computer scientist at a lower cost in India in the same way that it benefits from being able to buy lower costs clothes from China. However, hiring computer scientists has the additional effect of redistributing income downward in the United States towards less educated segments of the workforce.
British Clinic Is Allowed to Deny Medicine
Sarah Lyall
New York Times, February 16, 2006, Page A6
This article reports on the decision by the British national health care system to refuse to pay for a drug that costs $100,000 a year for a woman suffering from breast cancer. It is worth noting that the high price of the drug is entirely due to the fact that the British government provides the manufacturer with a patent monopoly. In a competitive market, it would likely sell for only a few hundred dollars a year.
Trying a New Tack, Fed Chief is Brief, Clear and Also Upbeat
Edmund L. Andrews
New York Times, February 16, 2006, Page A1
This article reports on Ben Bernanke’s first congressional testimony since replacing Alan Greenspan as Federal Reserve Board chairman. At one point the article reports on Mr. Bernanke’s statements on the housing market. The article reports that he anticipates some slowing in the market, but not a serious downturn.
It is worth noting that Alan Greenspan consciously decided not to publicly discuss the stock bubble, even though he recognized that stocks were hugely over-valued and would inevitably decline in price. Greenspan justified this decision by saying that it was inappropriate for the Fed to try to target asset prices and that it should instead be prepared to deal with the consequences of a crash when the bubble bursts.
If Bernanke shares Mr. Greenspan’s views about the appropriate response of the Fed to asset bubbles, then he would not discuss a housing bubble even if he believed that one existed. It would be worth noting this fact when reporting his public statements on the issue.
U.S. Pledges To Be Tough On China Trade
Paul Blustein
Washington Post, February 15, 2006, Page D5
Bush to Exert More Pressure on China Over Trade Rules
Vikas Bijaj
New York Times, February 15, 2006, Page D5
These articles report on statements about trade with China by Robert Portman, the Bush administration’s trade representative. At one point, the Times article asserts that economists are concerned that protectionist measures against China could “cause harm by distorting global trade and raising the price of imported goods.” It is worth noting that the United States already has extensive protection on a wide variety of goods and services. For example, the United States limits the number of foreign doctors who can enter the United States in order to maintain high salaries for U.S. doctors. It also has a variety of professional and licensing restrictions that protect other highly educated professionals from foreign competition. In addition, it imposes patent protections on prescription drugs, raising the price by 200 percent above the competitive market price. Given the huge distortions that are created by these forms of protection, it is difficult to see how any economist could be very concerned about distortions that could be created by tariffs or quotas on imports from China.
It is also worth noting that consumers in the United States will have to pay higher prices for their imports at some point regardless of whether the country implements protectionist policies. At present, the country is running a trade deficit that is more than 6.0 percent of GDP. This is like paying monthly bills by borrowing on a credit card. It cannot be sustained indefinitely. The borrowing will end when the dollar falls, which will cause import prices to rise, leading people in the U.S. to buy fewer imports.
The Post article reports that Mr. Portman believes the trade deficit is due to the fact that people are not saving enough. Increased saving will reduce the trade deficit by lowering the value of the dollar and/or reducing demand and employment in the economy. This means that if Portman believes that insufficient savings is responsible for the trade deficit he must believe that either the dollar is over-valued or that too many people have jobs, or both. The article should have attempted to inform readers as to which one of these views Mr. Portman holds.
Finance Ministers Meet Warily in Russia
Andrew E. Kramer
New York Times, February 11, 2006, Page B4
This article reports on a meeting of the G-8 finance ministers in Russia. At one point the article reports that Russia is repaying its debt to the IMF and World Bank ahead of schedule. It also reports that Russia is encouraging the wealthy countries to cancel the debt of the world's poorest countries.
The article then comments that because of its oil money, Russia “has more than the means to pay its debt; holding onto the cash runs a risk of overvaluing the ruble and hurting exports. In addition, the sacrifice proposed in the plan applies only to the creditor nations, not to Russia itself.” Actually, Russia did not need to repay its debt to prevent the ruble from rising. It could have lent its excess funds to the United States, as Japan and China are doing, which have raised the dollar against the ruble. It also is not clear what sacrifice the creditor nations will be making if they cancel third world debt, since it is not payable in most cases, and the money involved is trivial relative to the size of the rich country economies.
Volkswagen To Eliminate 20,000 Jobs
Mark Landler
New York Times, February 11, 2006, Page B1
This article reports on Volkswagen’s plans to eliminate up to 20,000 jobs over the next three years. At one point the article asserts that Germany has an unemployment rate of more than 10 percent. The official German measure shows an unemployment rate of more than 10 percent, but this measure counts people who are working less than 15 hours a week, but who would like full-time employment, as being unemployed. In the United States, these workers would be counted as being employed. According to the standardized OECD measure of unemployment (which is virtually identical to the U.S. measure), the unemployment rate in Germany is approximately 9.0 percent. In the area that was formerly West Germany it is approximately 7.0 percent.
Bush Budget Would Cut Popular Health Programs
Ceci Connolly
Washington Post, February 14, 2006, Page A3
This article reports on cuts to a number of small health care programs in President Bush’s 2007 budget proposal. It would have been useful if the article had indicated the share of the budget going to various programs in question. For example, the $12 million for a community-based Alzheimer’s care program, the $99 million for preventive health services, and the $1.5 million for defibrillators in rural areas (all programs slated for elimination) are equal to 0.000004 percent, 0.000035 percent, and 0.0000005 percent of projected federal spending, respectively. It also would have been useful if the proposed cuts were described in inflation-adjusted dollars.
Dean Baker is co-Director of the Center for Economic and Policy Research in Washington, DC.